Monday, 8 April 2019

In this short post, we will review the news from a couple of
weeks ago that Fitch Ratings, the third member of the Credit Rating Agency
oligopoly, has been fined by the European Securities and Markets Authority
(ESMA) for breaching its conflict of interest-related rules, specifically with
regards to its ownership.

Fitch Ratings is the third member of the rating oligopoly
and, like S&P is not a public company. Therefore, its ownership
structure is a little more opaque and difficult to accurately determine. We
know that the firm is owned by the influential Hearst Group, but only after the
Group increased its stake in the agency at the expense of previous majority
shareholder, French conglomerate Fimalac,
in 2014. It is in relation to the ownership of Fimalac that this current
regulatory action relates. Yet, whilst most CRA-related transgressive behaviour
revolves around weighted bias – weighted in relation to the power dynamics
within the rating industry and its connection to issuers and investors – this particular
transgression was far more obvious.

ESMA had been investigating Fitch’s ratings of a French
Supermarket group called Casino.
The investigation has now concluded that, in relation to its ratings of the
Casino Group from 2013 to 2015, the agency had failed to ‘meet the
special care expected from a credit-rating agency as a professional firm in the
financial service sector’. This was because between 2013 to 2015, one of
the supermarket’s Board – Marc Ladreit de Lacharriére – also owned a stake in Fimalac. As Fimalac was a majority
owner of Fitch at the time, this conflict should have been declared; this is
based on rules established in 2013 that states that nay shareholder with more
than 10% in the agency must not sit on the board of a company the agency then
rates. For not declaring and then removing the conflict, ESMA has fined Fitch
Ratings a record fine of €5.1 million. According to the Financial Times, that fine covered three other breaches for similar
violations.

What this episode does is bring into the limelight the
potential for transgressive behaviour within the credit rating industry – it is not agency specific. In
2015 S&P was fined a record $1.5
billion, whilst Moody’s was fined $864
million. First time observers may think that this demonstrates this
behaviour as only existing at the very top of the industry and, thus, creating
a ‘duopoly’ instead of the oft-cited ‘oligopoly’. However, the truth is that
Fitch provided documentary evidence detailing the transgressions of the other
two instead of settling with CalPERS – the Californian pension fund that
initiated the legal action against the Big Two – which tells us that they were
not entirely guilt-free, but possessed the evidence needed to avoid being
caught up with the Big Two. This current story tells us that it is the modern
version of a ‘rating agency’ which is actually the transgressive vehicle, and
not one particular agency. Fitch Ratings said, in response to the fine, that
they are well aware of the European Regulations and acted in good faith. If
this is true, then a record fine would not have followed. There are many
transgressive industries within the financial sector, but the sheer consistency
of transgressive behaviour from within the credit rating industry is
remarkable, and shows no sign of abating.

Tuesday, 2 April 2019

In today’s short post we will look at the news recently that
important players within the financial marketplace are jostling for position
with regards to the sale of a company that specialises in providing particular
information to the financial world. The emergence of NewsCorp and the so-called
‘Big Three’ credit rating agencies as potential purchasers of Acuris suggest
that this is a potentially important sale. However, the question for this brief
post is whether the sale acts as an indicator for a much larger, and much more
important sentiment.

Acuris, formerly the Mergermarket Group, is a ‘media company’
that specialises in providing financial information to the marketplace. More
specifically, it has been noted for its excellence in providing information on
Mergers & Acquisitions (M&A) to its subscriber base. Although its
current owners BC Partners only purchased the company in 2013 for £382 million
including debt, it is now widely
rumoured that the company is for sale. That proposed sale is drawing
in some of the largest players in the sphere, with News Corp and the so-called
‘Big Three’ credit rating agencies supposedly circling the company which
onlookers suggest could go for more than £1 billion. However, there have been a
number of reasons put forward as to why there is so much interest in the
company, with those reasons ranging from the reliable subscriber base that the
company enjoys, to the company’s year-on-year growth. Yet, one element that may
be the case is that the potential purchasers are of the strong belief that the
post-Crisis financial landscape will settle more than it has. One of the
reasons why this potential sale suggests that is a theory put forward by the popular
press and a leading audit firm: a relaxed financial environment
results in improved M&A markets.

Bonamie et al find that what they call ‘policy
uncertainty’ does negatively affect M&A activity. Lee agrees but
in respect of cross-border
M&A activity, which is obviously a major factor in the M&A
marketplace owing to the globalised nature of the market; the Financial Times reported at the end of
last year that global M&A activity for 2018 had eclipsed
a previous record set on the eve of the Financial Crisis. So, there
is evidence to suggest that global M&A activity is increasing and that the
trend may continue. How do we know the trend may continue? One clear indicator
of that being the case is the feverish speculation surrounding the sale of
Acuris and, particularly, who is interested in buying the company. News Corp,
S&P, Moody’s, Fitch, and private equity firms like KKR do not invest on
sentiment, and it is their business to foresee trends. The credit rating agencies
in particular work tirelessly in building a vast network of information
services to take advantage of future trends, a fact evidenced by Moody’s
relatively recent purchase of Bureau Van Dijk. If we accept that these
market-leading players foresee some increased level of stability within the
marketplace, then the question becomes is the regulatory framework strong
enough, post-Financial Crisis, to constrain such companies from taking
advantage of their position that they are currently jostling for position for?
Has the credit rating regulation been improved enough so that the inherent
conflicts of interest that remain within their business model do not affect the
M&A market negatively in relation to this potential sale? The answer
remains to be seen, but given the deregulatory
sentiment on offer in the U.S. and the potential for a regulatory
race-to-the-bottom post-Brexit,
we may already have the answer now.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.